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In the past, the return on investment (ROI) on housing assets was quite satisfactory and, in some cases, even spectacular, depending on the choice in terms of location, configuration, amenities, and builder’s brand.

While rental yields for residential assets in India have historically been low, capital appreciation alone was a sufficiently dynamic prospect for most real estate investors.

However, the hype around residential property investment has fizzled out over the last 2-3 years, with a prolonged slowdown severely affecting capital appreciation.

“As of now, investors with the financial wherewithal and understanding of the commercial real estate space find office assets far more attractive, and for good reason. In the first place, office properties in the right location and project can yield very good rental returns over prolonged periods, and the capital appreciation can also be considerable for the right office assets.

“Demand for office assets, for which there is a ever increasing requirement due to rapid employment generation and the possibility of the first REIT listings, is therefore quite high among investors,” Anuj Puri, chairman of ANAROCK Property Consultants, said.

In fact, office properties in well-located Grade A buildings, IT parks, and even in logistics centres are generating the kind of steady and dependable ROI that investors previously sought in the residential asset class.

“The commercial office space saw a bracing upsurge of private equity inflows in 2017, and this trend is likely to continue throughout 2018. With the first listings likely to happen in Indian REITs this year, we will see further infusions of liquidity into the commercial property asset class, and this will go a long way in amplifying the ability and willingness of developers focused on the commercial office segment to deploy more assets,” Puri says.

Meanwhile, the continuing sluggishness on the residential property market, coupled with the associated re-investment cycle risks, will also play a significant role in driving more investments towards various categories of commercial real estate.

Whatever be the case, the fact is that demand for the office space is growing faster than the demand for residential space in current times.

Vineet Taing, president of Vatika Business Centre, says: “After RERA and GST came into force, the residential market saw a slowdown with limited new launches and tepid sales. However, the commercial realty has remained robust with sustained demand. There is an increasing demand for office spaces which has led to the growth of business centres, virtual offices, as well as co-working spaces. In the Delhi NCR, the New Gurugram region and Dwarka Expressway are set to get a boost both in terms of office spaces as well as retail.”

Developers say that sales of commercial properties like shops, malls, and offices and storage facilities have grown in recent years – one reason being higher rental returns.

“The rental returns in the commercial real estate are higher than those in the residential sector, especially in places like the NCR, which is inviting more and more investors in this sector. The Indian commercial real estate is also attracting realty players from all over the world. This has increased competition in this sector, as a result of which buyers are getting the best,” Ravish Kapoor, director of Elan Group, said.

Pushpender Singh, managing director of JMS Buildtech, says: “From the investment perspective also, commercial space is currently a better option than residential. In India, the rental yields in the commercial real estate – which hover in the range of 8-10% currently – are one of the highest. Residential sector is giving yields of 3-4% only. We can safely say that with the rise of India as an ideal business destination, the commercial realty space will remain an attractive option for investors.”

There is an uncanny similarity between the stock market and the real estate market today. Though the overall equity market is looking weak, there are several stocks worth investing right now. Similarly, though the broader real estate market is flat, action is happening at the micro level. There are several pockets across metros and large cities where property prices are reasonable and investors can expect Good Returns.

However, don’t expect prices to shoot up like they were between 2005 and 2008. “Rental yield can be a good yardstick for residential real estate. Investors should get in only when the rental yield is more than 3%,” says Pankaj Kapoor, MD, Liases Foras. The introduction of the Real Estate Regulation Act helps buyers but has removed the information asymmetry that helped generate High Returns from property. “Real estate, especially New Launches, used to double in value in 3-4 years; that phase is n ..

Second, the focus has shifted from premium properties to the affordable and mid-priced segments. Due diligence by home buyers has also improved. “Home buyers are taking time and doing indepth research like visiting property sites several times before buying,” says Jayashree Kurup, Head – Content & Research, MagicBricks. “Three main factors to check is the credible developer, right-sized house and good price. Unlike earlier, home buyers now insist that all three are in place,” says Sharad Mit ..

This week’s cover story looks at micro markets that are doing well and could offer value to buyers. We examine the factors that have worked for these pockets and tell you why you should consider buying property in these hotspots.

Improving connectivity and quality of space are plus points.

Gurugram Strong Showing

Improving connectivity and quality of space are plus points.

Availability of high quality office space at reasonable rates has helped Gurugram score over more expensive Delhi. “Gurugram remained the preferred office destination in NCR with about 57% share in overall leasing in 2017,” says Sachdev of Colliers International India. In addition to the cost advantage, proximity to the airport is another attraction. The price performance in Gurugram has been unlike other cities. A similar trend is expected in the coming year as well. “Premium office occupiers will continue to prefer Cyber City, Golf Course Road and NH 8 owing to their enhanced connectivity,” says Sachdev. Similarly, the state government’s efforts to decongest the Gurugram-Alwar highway should make commuting easier from Sector 48.

NEW DELHI: Gurgaon remained the preferred choice for opening offices in the National Capital Region (NCR) among companies, grabbing 51% share or 3.88 million square feet of the total office space leased in the region in 2016, according to property consultancy Colliers International.

Noida and Delhi accounted for about 36% and 13% share, respectively, out of the total 7.6 million sq ft office space absorbed in the NCR in 2016, at par with 2015 numbers.

While the technology sector remained the key driver of office leasing activity in Gurgaon with a 32% share, the share reduced from the last year’s number of 64%.

In Noida, also the technology sector remained the key demand driver with 60% share.

A total of 41.6 million sq ft of office space was leased last year across the top cities in India, with Bengaluru maintaining its leading position with a 31% share or 12.8 million sq ft of office space leased.

Delhi-NCR took the secnd spot with 18% share of the total occupier demand, followed by Mumbai with 14%, Hyderabad and Chennai with 13% each, and Pune and Kolkata with 9% and 2%, respectively, showed the report.

“In the technology driven markets such as Hyderabad, Bangalore, Pune the demand-supply gap is likely to remain a concern in short term. Tenant appetite for higher quality offices has been reflected in new leases being executed at above market rates in select grade A buildings in all the cities,” said Surabhi Arora, Senior Associate Director, Research at Colliers International.

Just 27.2 million sq ft of Grade A office space was released into the market in 2016. “This was insufficient to cope with the very strong demand especially in markets such as Bengaluru, Hyderabad, and Pune and resulted in a significant fall in vacancy levels and an increase in office rents in most of the micromarkets in these cities,” she said.

Colliers expects a similar trend in 2017 as well, with an upward pressure on rents at least in the first half of the year in most of the preferred markets for grade A buildings.

However, due to a dearth of quality office space in other technology-driven markets like Pune and Bengaluru, NCR may see increased absorption volumes in the coming quarters due to supply-led demand, feels Arora.

Average office rentals in Delhi-NCR have remained static at Rs 77 per sq ft per month in the first half of 2016, compared to the year-ago period, according to property consultancy JLL India.

Submarkets of Gurgaon and Noida, however, witnessed a marginal rise, with average year-on-year rents increasing 1% and 5%, respectively, to Rs 75 and Rs 43.

Office rentals in Gurgaon’s Cyber City is inching closer to triple digits. “The profile of tenants has changed in recent years. From being back offices with strict dependence on cost arbitrage, the tenant profile now includes consulting, high-tech engineering and design firms,” said Santhosh Kumar, chief executive officer, operations & international director, JLL India.

“Presence of non-IT companies in such traditional IT holdouts has also increased,” he added.

Delhi-NCR also had the highest vacancy rate of almost 32% in the June quarter this year, mainly due to inventory pile up at peripheral locations such as Manesar, Greater Noida and the extended parts of NH-8.

Bengaluru leads the way in vacancy rates, with only 3% of office space vacant as of the second quarter of 2016, followed by Pune and Hyderabad, with vacancy levels of 6% and 9%, respectively. Chennai comes next at around 12%, followed by Kolkata and Mumbai at around 19%, each.

In terms of having the most grade-A office stock, Gurgaon micro-market leads the way followed by Noida and SBD. Delhi city has limited grade-A supply, according to JLL.

The combination of retail and office complexes may not be entirely new to metro cities, but the trend of setting up such combined projects is fast catching on. Developers are now looking at experimenting more with a mixed-use format rather than standalone retail formats, allowing for quality retail on the lower floors and commercial spaces on the upper floors.

Even today, key portions of several office buildings in property markets are occupied by food & beverages and retail BFSI outlets. Such mixed-use retail developments have opened up a new format that will attract select categories of retailers. “Of the total retail presence in office buildings across major tier-I cities, 26% is occupied by food & beverages and a significant 23% is occupied by retail BFSI outlets.

While retailers get the dual advantage of paying lower rents compared to premium spaces in Grade A malls and closer access to their main target segment of office-goers, developers are also open to experimenting more with a mixed-use format rather than a standalone retail format,” said Anuj Puri, country head, JLL India. Such office-retail complexes (ORCs) are emerging as alternatives to high streets, and even malls, for some categories of retailers.

“It is very important to bring in an optimum mix of retail spaces, which are best suited within that setting. Essentially food, BFSI related outfits bring life into these business districts and should be planned more to optimize the commercial user and not just retail space to maximize rental revenues,” said Vinod Rohira, managing director, K Raheja Corp.